Japan's Overnight Rate Goes Negative for First Time Since 2004

  • Volume-weighted average rate declines to minus 0.002 percent
  • Outstanding balance of call market plunged 73% on Tuesday

Japan’s unsecured overnight call rate dropped past zero for the first time in more than a decade, a day after the Bank of Japan began charging interest on some lenders’ excess reserves.

The volume-weighted average for the rate in the overnight call market -- ground zero for funding because it is where banks lend to each other -- fell to minus 0.002 percent, the lowest since November 2004, according to BOJ data.

“It’s true trading was done at minus rates in the overnight call market,” said Kenji Sato, a manager at the planning and research department of Central Tanshi, a Tokyo-based money-market dealer and broker. 

Overnight borrowing costs had managed to stay above zero for more than a week after 10-year government bonds yields went negative following the BOJ’s Jan. 29 announcement that it would charge 0.1 percent on some lenders’ deposits at the central bank from Tuesday. Governor Haruhiko Kuroda said earlier this month that rates may be cut further if needed.

Yen index swaps indicate the overnight rate will be minus 0.22625 percent during the period between the BOJ’s meetings on Oct. 31-Nov. 1 and Dec. 19-20, according to data from Meitan Tradition.

Volume Plunges

The outstanding balance of the call market fell 73 percent to a low of 4.54 trillion yen ($40 billion) on Feb. 16, according to data from the Brokers Association. Activity has been subdued since Tuesday because few financial institutions have systems that can handle negative rates, Central Tanshi’s Sato said.

The BOJ’s negative rate on Tuesday would have applied to 23.2 trillion yen if the policy had been in place last month, the bank estimated. While the new monetary tool took effect yesterday, figures for its application won’t be available until the middle of March. The central bank had previously estimated the minus rate would be applied on about 10 trillion yen of financial institutions’ reserves held at the BOJ.

Before it's here, it's on the Bloomberg Terminal.